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Mixed earnings and anticipation of tighter monetary policy leading up to this week’s Federal Reserve meeting sent stocks down last week. The S&P 500 ended the week -3.3%, the Dow was -2.5%, and the NASDAQ was -3.8%. The 10-year U.S. Treasury note yield increased to 2.938% at Friday’s close versus 2.905% the previous week.
We will hear from the Federal Reserve with its next monetary policy decision on Wednesday at the conclusion of the FOMC meeting. An increase of 0.50% in the Fed funds rate is likely, along with commentary on the pace of winding down the Fed’s balance sheet from its COVID-era expansion.
The first quarter earnings reporting period continues with 160 companies in the S&P 500 Index scheduled to report earnings this week. The current consensus for 1Q22 is 10.1% earnings growth on 12.5% revenue growth versus 6.1% earnings growth on 10.9% revenue growth at the start of the earnings season. For the 275 companies in the S&P 500 that have already reported first quarter earnings, 80.4% have reported earnings above analyst estimates. This compares to a long-term average of 66% and prior four quarter average of 83.1%.
In our Dissecting Headlines section, we look at the factors impacting the 1.4% decline in first quarter GDP.
Financial Market Update
Dissecting Headlines: First Quarter GDP
Real gross domestic product (GDP) decreased at an annual rate of 1.4% in the first quarter of 2022, according to the advance estimate released by the Bureau of Economic Analysis (BEA). The advance estimate is subject to revision as additional data is collected. The second estimate for first quarter GDP, based on more complete data, is scheduled for release on May 26, 2022. Headline GDP is presented as a sequential change, meaning GDP for the first quarter of 2022 was 1.4% lower than the fourth quarter of 2021. On a year-over-year comparison, GDP for the first quarter of 2022 was higher than the first quarter of 2021.
While the headline contraction in GDP was unexpected, some of the elements causing the decline are not necessarily strong negatives. Government spending was 2.7% lower. Given the large increase in government spending over the past two years to stem the impact of the pandemic, a decrease in government spending should be welcome. Much of the percentage decrease in federal spending, however, was defense related -8.5% versus nondefense -2.2%. Another area of decline was inventories, led by motor vehicles. Given the supply chain shortages in motor vehicles, this can potentially correct itself over the course of the year. Lastly, a decrease in exports -5.9% and increase in imports +17.1% caused a net decline to the export/import balance. Given higher oil prices, this can possibly also correct itself over the course of the year.
Positives in the GDP report were personal consumption expenditures (i.e., consumer spending) +2.7%, nonresidential fixed investment led by businesses buying equipment +17.2% and spending on intellectual property +8.1%, and residential fixed investment (i.e., housing) +2.1%.
Based on the GDP report we have good visibility into what is working and not working in the economy. This allows us to monitor data for specific areas that impact our investment strategies.
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